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Risk management is the practice of identifying, assessing, and controlling potential losses in trading. It encompasses position sizing, stop losses, risk-reward ratios, portfolio diversification, and emotional discipline. Effective risk management is a key factor separating profitable traders from unprofitable ones. The goal is not to avoid losses entirely but to keep them small and controlled relative to gains.
A risk management plan might include: risk no more than 1% of account balance per trade, always use a stop loss, maintain a minimum 1:2 risk-reward ratio, never add to a losing position, and take no more than 3 correlated trades simultaneously.
